Interest rates are expected to continue to rise incrementally, affordable financing is available for commercial projects, high land prices are a problem, and the planned 1,200-room Hilton Hotel next to the San Diego Convention Center shouldn't be too hard to finance.
These were some of the conclusions reached by a panel of lenders at a forum by the Commercial Real Estate Association of San Diego at the Radisson Hotel in La Jolla last Thursday.
Forum moderator Tony Villasenor, a partner in Grubb & Ellis|BRE Commercial, asked how higher interest rates might affect the lending picture.
Ken Austad of La Jolla-based Silvergate Bank noted that prime interest rates are already climbing. Depending on how mortgage rates follow, this could spell trouble for highly leveraged consumers with variable rates, according to Austad.
Larry McDonald, of the local office of Wells Fargo Bank (NYSE: WFC), said home equity lines continue to be a very hot ticket item and also warned of the dangers of taking too much out and not being able to pay it back.
When asked about interest rates, Jason Bigham of GMAC Commercial Mortgage said while it is impossible to imagine that mortgage interest rates will remain as low as they are, there still is plenty of room for growth before they would become unaffordable.
McDonald said while his institution's real estate lending group has continued to grow, "some investors are taking their chips off the table in California."
Austad said while this area continues to have major transactions, he too is seeing more overall activity in places like Las Vegas and the East Coast.
McDonald then tempered his own statement by suggesting that San Diego continues to be one of the strongest investment markets in the country. "Fortunately, the economy is more broadly based than it was in the 1980s," he said.
Tim Highstreet of San Diego-based Torrey Pines Bank said the market is strong enough that he is seeing multiple bids on commercial properties. But given these multiple bids, it isn't always easy to determine what a property is worth. Austad said Silvergate doesn't rely only on appraisers, but also works closely with commercial brokers to get a more complete picture.
As for loan volume, there seems to be no slowdown. Bigham said GMAC Commercial Mortgage funded some $22 billion in loans last year, and is already running at about 40 percent better than that pace thus far in 2005. "We're optimistic. We're peddling as fast as we can," he said.
Highstreet said his much smaller institution has funded $60 million in loans thus far this year, "and also shows no signs of slowing down."
Loan-to-value ratios are still based on the creditworthiness of the borrower. Bigham says GMAC will provide as much as 95 percent of the capital "for someone who knows what they are doing."
McDonald said there is no hard and fast rule as to whether or not loan-to-value ratios are more stringent or more lax today.
"We are underwriting pretty conservatively. We want to make sure our assessments are accurate. We're not so much hung up on loan to value," he said.
Bigham sees this a bit differently. "I would say the underwriting standards are letting up a little bit, which is nice, because it was just tough to get a deal done in Southern California," he said.
Financing hotels has often been difficult. It took Manchester Resorts about two years to land its lenders for the second Hyatt Tower next to the convention center, but Bigham said the time is ripe to bankroll even very large hotels, such as the planned 1,200-room Hilton Hotel planned for the Campbell Shipyard site next to the convention center.
"It will get financed, and I believe the developers (a team of CNL Hospitality of Orlando and Portman Holdings of Atlanta) will get multiple offers from lenders," Bigham said.
With new technology, the loan processing time are generally faster, but a loan can get bogged down if it has to go to a home office for approval. Austad said Silvergate gets around that problem by giving local approval authority to its agents.
All seemed to agree that ever-rising prices coupled with higher interest rates will do nothing to make lending any easier. Villasenor lamented the land values that are as much as $200 by the beach and $500 downtown.
"How do you make that pencil?" he said.